Big-Bank Cutbacks Hit Tech Vendors

Don't expect to see too many major technology projects at big banks until sometime next year.

The top three financial tech vendors all say that big-bank spending remains largely on hold, unless the investment is absolutely necessary or can generate an immediate return. And though Fiserv Inc., Fidelity National Information Services Inc. and Metavante Technologies Inc. all reported solid earnings in the past week, the gains came largely from cost-cutting efforts rather than new business.

Banks "are not spending a lot right now," Lee Kennedy, Fidelity's president and chief executive, said during a conference call Tuesday to discuss the vendor's second-quarter results. "Everything we have seen in our conversations with our top-tier banks is that sometime toward the end of the year, as we roll into next year, we will see an improvement."

Michael D. Hayford, Metavante's president and chief operating officer, said technology is still a low priority at many companies. "Banks are very, very focused on capital right now and capital preservation," with many spending only where they are confident of a significant return on their investments, Hayford told analysts last week.

Jeffery W. Yabuki, Fiserv's president and CEO, said that bankers have begun talking more about future plans but these conversations are still very preliminary. "Although there is a sense that the sector outlook has started to stabilize, we do not yet see that headline turning into any material change in current-year buying behaviors," he told analysts Wednesday. "We are not planning for the economy to get materially better until the end of 2010."

Big banks sharply cut their spending last year as the financial crisis took hold, prompting all three vendors to tighten their belts this year.

John Kraft, an analyst at D.A. Davidson & Co., said that strategy paid off in the second quarter. "Cost discipline for all these guys was really the story," he said. "Nobody is claiming business is improving. We're just bouncing along the bottom. Things don't seem to be getting worse."

Revenue dropped at Fiserv and Fidelity and rose only slightly at Metavante.

David Koning, an analyst at Robert W. Baird & Co., said that all three derive much of their top line from ongoing contracts to provide core processing and payments services to small and midsize banks. Those deals continue to deliver a steady stream of service fees, which is important, but the dearth of software deals with big banks held back revenue growth.

"Even struggling banks that are undergoing regulatory actions are still paying their bills to Fiserv, Fidelity and Metavante because they have to, to survive," Koning said. "Even after the FDIC takes over a bank, they still have to maintain their operations."

To be sure, tech spending has not dried up completely. Small banks, especially those that managed to keep their balance sheets relatively clean and have escaped the worst of the meltdown, have continued to invest in new technology. In past quarters the top vendors have taken pains to note that they were continuing to land new contracts from this group.

Kraft said that remains the pattern. "It's becoming more clear that generally speaking, it's the bigger banks that are delaying their spending decisions," Kraft said. "They still seem to be signing deals with the smaller banks."

He also said that the vendors might have additional growth in the next few quarters as more banks decide to outsource more of their operations. "There's an increasing propensity for banks to want to outsource rather than to do things internally, and that is being accelerated because of the current environment," he said. "They've got other priorities right now."

The vendors have managed to close a few major deals in recent months.

Fiserv, of Brookfield, Wis., used its earnings report to announce that PNC Financial Services Group Inc. had agreed to convert National City Corp.'s online bill-payment service to Fiserv's, making the Pittsburgh banking company one of Fiserv's top five bill-pay customers. Yabuki said the conversion should start before the end of the year. PNC acquired National City, of Cleveland, last year.

Overall, Yabuki said, the bill-payment service that the company acquired with CheckFree Corp. signed 102 new clients in the quarter, 40% of which were competitive takeaways.

Fiserv said its net income in the second quarter jumped 40%, to $140 million, or 90 cents a share, from the year-earlier quarter. Revenue fell 20%, to $1.03 billion, partly as a result of the April 2008 sale of Fiserv's insurance division.

Fiserv's adjusted earnings from continuing operations, also 90 cents, topped the 88 cents per share that analysts had expected, but revenue missed their $1.04 average estimate.

Hayford said that Metavante, of Milwaukee, also had some key wins as banks tried to improve their competitive position.

"Image is a great example where we actually had a couple of deals that moved this year that hadn't moved last year, simply because the ROI is so compelling that they were able to get it through their committee."

Other banks are making investments to position themselves for the economic upturn, he said.

"So I'd say those are the two predominant things — it's using those dollars wisely and getting quick returns, or looking on at a more strategic investment and looking at how they can come out of this economic climate and take advantage of it," he said.

Metavante said its net income grew 41% from a year earlier, to $51.9 million, or 43 cents a share. Revenue grew 4%, to $440.3 million.

It also raised its guidance for the rest of the year, though it is not likely to report full-year results before its sale to Fidelity closes.

Fidelity, of Jacksonville, said its net earnings fell 18% year over year, to $59.6 million. Revenue dropped 4%, to $834.8 million.

But its adjusted net earnings, the number that Wall Street watches, grew 24%, to 42 cents a share. Analysts, on average, had anticipated earnings of 36 cents a share on revenue of $838.3 million.

Fidelity also raised its guidance and said the Metavante deal is on track to close in the fourth quarter. It now expects net earnings of $1.71 to $1.75 a share this year, raising its guidance from a range of $1.60 to $1.66 per share. The company said it expects revenue to be off slightly compared with 2008's.

Kennedy said his customers are "waiting until the financial strength of the bank improves. Once that does, I think we're going to be in really good shape going forward."